The Dwarves are a race of Faerie that centuries ago, through the assistance of Dragon magick, have somehow renounced their immortal Faerie heritage for a mortal, if long-lived, existance.
Unlike other Faerie, they are immune to the effects of Iron and Cold Iron. In fact, they have an affinity for all metals, and can literally smell metal in the area. They are also completely immune to flames and fire. Throw a dwarf into a lava pit, and you get an angry, naked dwarf. They are also highly resistant to Magick.
Dwarves in Castle Falkenstein are consummate craftsman, tinkerers, and artists of metal and rock. Although some have become great warriors, they are more likely to be found as a combat engineer in battle, tending to artillery or steam boilers rather than swinging Hammers and Axes in melee combat.
Dwarf society centers around underground cities called Dwarfholds, often built into mines or mountains. A dwarfhold can almost be considered a separate city-state from its surroundings, and it is maintained through active trade with mortal businesses and nations. Dwarfholds are ruled by "Kings", but such rulers act more like business managers, making sure that their domain remains profitable and that production continues at an acceptable level.
There are no female Dwarves in Castle Falkenstein. Being of Faerie stock, they breed easily with any female Faerie being. This leads to rather incongruous (by mortal standards of beauty) marriages, but Dwarves are considered by Faerie women in general as a "good catch". Their offspring take after the parents, either ending up as a Male Dwarf or a Female Faerie of the appropriate type.